Stock of the Week: RBC

Can you beat Canadian banks right now?

Andrew Willis 14 March, 2022 | 4:18AM
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Andrew Willis: With more rate hikes on the way, and high consumer debt levels, lenders seem to have a bit of a payday ahead of them. But we’re already starting to see interest.

RBC’s net interest income is up 5% year over year, fees are up 12% and altogether return on equity hit 17%. Our base-base case scenario for the bank is that net interest margins will grow through 2025, with an average loan and deposit growth of around 4-5% per year.

But with all the potential rising rate upside ahead, how will the company manage amidst accompanying cost inflation? Probably pretty well if the recent quarterly results are a clue. Up only 1% year over year, RBC’s expenses appear to be under control. Why is that?

One contributor to low expenses is high margins and having the largest exposure to the higher-margin, fee-based investment business, which thanks to its scale and reputation, RBC has attracted. And this scale is supported by systemic advantages.

Senior equity analyst Eric Compton says he sees the oligopolistic Canadian banking environment as offering systemic cost advantages for banks under its domain. Lower operating costs, lower credit costs, lower regulatory costs…and as a result lower absolute levels of and better diversification of risks – which means better risk-adjusted returns. Which sounds to me like the bottom line…

For Morningstar, I’m Andrew Willis.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Royal Bank of Canada127.25 CAD0.21Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar.ca. Follow him on Twitter @AndrewWillisCDN.

 

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